NEW ENERGY: LeEco’s Car Dream Hits Nevada Speed Bump

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Bottom line: Skepticism by Nevada’s treasurer could kill LeEco’s plans for a $1 billion car plant in the state, and such doubts are justified due to the company’s lack of transparency and reliance on an inflated stock price to raise money.

Nevada treasurer wary of LeEco car plant financing

Plans by online video superstar LeEco (Shenzhen: 300104) for a new energy car plant in Nevada have hit a speed bump, with word that the state’s treasurer is skeptical of using loans backed by the company’s stock to finance the $1 billion project. The fact that LeEco is hitting this resistance in Nevada is somewhat ironic, since the state is famous for its embrace of gambling. But in this case I do have to applaud Nevada treasures Dan Schwartz for his skepticism, since I personally think LeEco has built its sudden entertainment empire on a hugely speculative pile of debt and hype about China’s Internet.

Anyone who believes all the hype from LeEco, formerly known as LeTV, need only look at the company’s stock to see why people like Schwartz and myself are skeptical. The company’s stock suddenly became an investor darling in 2015, and rose more than five-fold in the first 5 months of that year amid a huge China stock market rally. Since then the stock has given back some of the gains, though it still trades around 3.5 times its levels at the opening of 2015, and has a current market value of 98 billion yuan ($14.6 billion) and sky-high PE ratio of 163.

We’ll return to some of LeEco’s questionable practices shortly that are further causes for skepticism, but first let’s review the reports on Schwartz’s doubts that could ultimately kill company plans for a $1 billion car factory in North Las Vegas. Schwartz’s agreement is critical for the project, since Nevada will need to build and upgrade infrastructure to serve the plant.

Specifically, Nevada would need to issue $120 million in bonds to finance the building and upgrade of facilities like power lines, water mains and roads. Schwartz, who comes from a private equity background in Hong Kong, is skeptical about LeEco’s plans due to its heavy reliance on stock held by company chief Jia Yueting to back the many loans the company is using to finance its broader expansion. (English article)

It’s a bit unclear if LeEco plans to finance the Nevada plant with similar loans, but Schwartz seems to be concerned about such a possibility and is calling on the company to be more transparent. His worries seem to center on the potential for a crash in the company’s stock, which could prompt lenders to abandon the LeEco. That would leave Nevada with $120 million in unnecessary infrastructure improvements.

New Directions

LeEco’s car ambitions are just one of many new directions that the young and ambitious Jia has chosen for his company in the last couple of years. Jia himself mysteriously disappeared for several months 2 years ago, and then suddenly reappeared in a Beijing hospital amid word that he was being treated for an undisclosed form of cancer. That alone could be a risk for investors, though it’s certainly not a reason to doubt Jia’s and the company’s credibility.

The much bigger risk is that LeEco is an extremely non-transparent company that has raised millions or even billions of dollars in cash to finance its many new projects, much of that coming from investors who have bought into its hype. The company’s core focus remains on entertainment, but it has branched out from providing an online video service to also making films and running a separate sports division. It has also placed big bets on smartphones and cars, as part of its dream of building an ecosystem around entertainment content and hardware to deliver that content.

But the company doesn’t talk much about its finances except for what’s disclosed from its publicly traded unit, which doesn’t include many of its operations. I suspect the entire group is probably losing money, perhaps lots of money, due to its move so quickly into so many new areas. That alone could be cause for concern. But LeEco’s dependence on an overly inflated stock value to support its expansion is yet another major risk, which is rightly raising concerns for its investment plan in Nevada.

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